The Home Equity Sales Act: What it Means to Sellers (Part 1 of 2)

For a number of reasons, it is becoming increasingly more attractive to potential homebuyers to purchase pre-foreclosure property. In order to gain the most protections, the optimal time for buyers to do is during the time period after the foreclosure process has began but before the foreclosure sale has taken place. Doing so allots buyers all of the standard protections in regular purchase transactions, including personal access to the property, expert inspection of the property, and qualifying the purchase on the issuance of a title insurance property. They are also thus covered by statutory protections which mandate that the seller disclose certain conditions to the buyer and that a “transfer disclosure statement” is provided to the buyer outlining the property conditions. Many of these rights are not present if a buyer purchases at the foreclosure sale, or after the trustee’s sale. While the time period between the foreclosure commencement and the foreclosure sale is certainly the optimal one for potential homebuyers to purchase troubled properties, these transactions are subject to the provisions of the Home Equity Sales Contract Act. This act provides protections to sellers of troubled properties, and in doing so may impose obligations upon potential buyers of such properties. While the Act is designed to protect sellers from unscrupulous buyers, its scope is not limited to those and it imposes penalties upon those committing even inadvertent transgressions.

One of the Act’s major provisions grants the equity seller an absolute right to cancel the contract during a certain time period. During this period, the equity purchaser may not take title to the property, transfer interest in the property, or pay any consideration to the equity sellers, amongst other restrictions. One way that equity purchasers may protect themselves in light of the “cancellation right” is to make the initial deposit to the escrow holder and instruct that it not be transferred to the equity seller until this period has ended.

The Act also requires that any contract contains the entire agreement within the purchase and sale contract as one document, and that the contract must adhere to certain language, font size, and lettering instructions. A good starting place for potential homebuyer is to use form contracts, but even these must be edited in order to ensure they comply with the Act. For instance, homebuyers who wish to have a rent back agreement must insure it is included within the one contract, although most form contracts instruct buyers to refer to a separate agreement. These forms also fail to state that consideration, including the deposit, should be withheld by the buyer until the cancellation period has ended. They also do not include a “notice to release” which unless included, cannot be signed by the equity seller until after the cancellation period. While these are seemingly minor and technical details, equity sellers are rewarded under the Act for any mistakes made by the equity buyer.

(This article is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. If you have any questions about this Article, please call or e-mail Stephen Vokshori, Esq. (213.785.5366 / stephen@voklaw.com) or any other member of Vokshori Law Group.)

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[…] The Home Equity Sales Contract Act provides provisions regarding “representatives” of purchasers as well. If the equity purchaser wishes to have a “representative” in the transaction, the representative must provide the equity seller proof and a statement that he or she has a valid and current California Real Estate Sales License. The representative’s failure to do so gives the equity seller the right to cancel the transaction under the Act. If the purchaser uses an unlicensed individual as a representative, he or she risks having the transaction cancelled by the seller after it has been completed. […]

[…] recorded at the close of escrow, with a Grant Deed conveying full title to the buyer, with Title Insurance issued. Sellers are responsible for payment on the underlying loan. Their equity position on the […]